Quality products and quality companies are not the same thing.
After Warren Buffett made his now-famous investment in Gillette back in 1989, he said "It's pleasant to go to bed every night knowing there are 2.5 billion males in the world who have to shave in the morning". I was minded of that when I had a shave recently, with a new razor.
No, it wasn't a Gillette Mach 3 Turbo with its trio of blades, or a Wilkinson Sword Quattro with its even more excessive quartet. It was one of these, a classic safety razor that was actually inspired by Gillette's 1904 original. And with its single conventional blade, it works like a dream -- it's by far the best razor I've used.
Quality company
But what really struck me was that Gillette had perfected the razor more than a hundred years ago, and, along with its competitors, has spent the next century making them worse.
Or rather, what happened was that in the 80s the marketing departments took over, and went all out to convince us that we needed disposable razors, two blades, three blades, four blades, funny little lubricating strips, blue indicators, and all sorts of nonsense.
They made them fashionable, "high tech", and, more importantly, higher margin. The decline in actual quality didn't matter. Gillette went from knowing how to make great stuff, to knowing how to sell stuff well.
Quality products
It was only a few years after Buffett's purchase that I started in my own investing career, and by the mid nineties the word amongst many private investors was that Marks & Spencer (LSE: MKS) was a great investment, because it sold better stuff than its competitors. And you can never go wrong with quality.
But by that time M&S was starting to lose the plot. Between 1998 and 2001 its profits, and its share price, slumped. M&S was going the opposite way to Gillette -- it was concentrating on quality goods, but had lost all idea of how to sell them.
In fact, the company was so inept at selling that it wouldn't even accept credit cards until 2001. It was snobbishly saying "Oh no, your kind of money isn't good enough for us."
The best of both?
So good investments often come more from finding companies that are good at selling what they make, rather than making great stuff in the first place.
But the truly great investments are in the few companies that actually make top-quality products and know how to sell them -- ones that combine the development of genuinely great stuff with the best marketing and sales departments. There are very few that fit that particular bill.
Some will disagree, but I think Apple Computer is one of them. Apple is a company that for many years made superior products to its competitors, but really didn't have much of a clue about selling them. That was until Steve Jobs returned to the fold and created a marketing culture that has since achieved cult status.
And I think Google has been another, as every product or service it turns its hand to, it seems to do better than the competition. Starting out as a search engine, it quickly overshadowed its rivals, and since then has moved into so many other fields and has come up with the goods. And it's no slouch at turning its enormous database into marketing intelligence, which is uses to great effect.
Razors?
And Gillette? Well, it clearly was a good investment for Buffett, and I'm really not disagreeing with him at all (as if I would!).
When it comes to mediocre commodity products, the majority of consumers will just buy whatever is being advertised, and won't give it any more thought than that. And companies that have the know-how to advertise better and sell more will always do well.
But I still hanker after finding the next Apple or the next Google, and it is such thoughts that occupy my shaving moments. I doubt I'll come up with the answer, but I will at least spend a lot less on razor blades than the cost of those nasty multi-blade plastic things with go-faster strips.
Any thoughts on great companies, or great products, or better still, combinations of both? Do let us know, below. Shaving tips are welcome, too.
More from Alan Oscroft:
> Claim your FREE financial guides -- The Motley Fool has teamed up with a number of partners to offer our users free financial guides on topics such as tax planning, funds and much, much more. Click here to download your reports today!
